Iran - Iberglobal

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9
11
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Iran: A new era
after the lifting
of sanctions
Forecast for
Iranian sectors
IInterview
Conclusion
PANORAMA
March 2016
IRAN: SHARP TURN AHEAD,
DRIVE CAREFULLY
COFACE ECONOMIC PUBLICATIONS
A
fter five years of sanctions,
Iran is finally to rejoin the
global community. The
return of Iran should have
an effect on international
growth through the oil
channel but above all, will bring huge
changes to Iran itself. International
sanctions have impacted the Iranian
economy. Two consecutive years of
negative growth and runaway inflation
have tested Iran’s resistance model to its
limit. The lifting of the EU embargo will
allow Iran to revive its oil sector and
return to the global market. The country
is perceived as a new Eldorado, with its
78 million potential consumers. More
over, with its huge oil and gas reserves,
skilled labour force and strategic location,
Iran is holding all the cards to become
one of the top emerging economies
during the next few years.
By the Group Mediterranean & Africa Economists
The lifting of sanctions, following the P5+1
agreement, will have a significant effect
on raising Iran’s output. Coface expects
real GDP growth to stand at 3.8% this
year.
However, moving from autarky to
openness is a sharp manoeuvre to
manage. The country may face adverse
effects from trade liberalisation. The surge
in capital inflows and increased oil exports
could lead to an exchange rate
appreciation that would be a hurdle to the
competitiveness of non-oil exports.
Indeed, fear of a ‘Dutch Disease
syndrome’ remains present over the
medium term.
The unfavourable global environment and
structural problems may delay the gains
expected following the removal of
sanctions. The rebirth of the oil sector is
likely to be slower than projected, due to
ALL OTHER GROUP PANORAMAS ARE AVAILABLE ON :
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the lack of investment and the downturn
in the oil market. The low price of the oil
barrel may cost Iran 2.8% of its GDP if it
remains unchanged (i.e. 33 USD/b).
Morever, the country’s isolation, obsolete
infrastructures and weakened banking
system will challenge the positive dynamics of its reintegration into the global
world trade market.
Nevertheless, there are sectors other than
oil that will benefit from the lifting of
sanctions such as the automotive industry
which, prior to the sanctions era, was the
largest car producer in the Middle East.
2
PANORAMA
1
IRAN
IRAN: A NEW ERA AFTER THE LIFTING OF SANCTIONS
“The lifting of sanctions will be gradually effected over the
next ten years, while over a period of fifteen years the
sanctions can be restored in case of failure by Tehran to meet
its requirements.”
Sofia TOZY
Economist
Seltem IYIGÜN
MENA Region
Economist
Following the 1979 Iranian Revolution and the
seizure of the US Embassy in Tehran, the United
States imposed restrictions on activities with Iran.
These sanctions became broader in 1995 and again
in 2005. By late 2010, other Western countries had
imposed similar sanctions on Iran, discouraging
international companies from the Iranian market if
they wished to avoid problems with Western
governments and regulations. In 2012, the US
banned banks from completing oil transactions with
Iran, while the European Union introduced a
boycott on Iranian oil exports. The EU also
introduced further sanctions, which focused on
trade and banks, including the asset freezing of
companies and individuals providing technology to
Iran.
The US banned almost all non-humanitarian US
trade and investment with Iran and prohibited
companies from knowingly transshipping US goods
to Iran via other nations. Sanctions included the
freezing of Iranian assets including gold, bank deposits and other properties. The sanctions also limited
Iran’s ability to extract and refine oil and gas –
activities that the Iranian economy relies on. The aim
of blocking oil exports was to isolate Iran financially
and to prevent it from developing nuclear weapon
capacities.
“The lifting of
sanctions will
particularly
support private
consumption and
exports.”
After more than 10 years of diplomatic attempts to
address Iran’s nuclear policy, Iran and the P5+1
countries (China, France, Russia, the United
Kingdom, the United States and Germany) reached
a preliminary framework agreement in July 2015.
The deal saw Iran agreeing to restrict its atomic
programme, while the US, EU and UN in return
promised to lift sanctions. The sanctions were
officially lifted after the International Atomic Energy
Agency (IAEA), the UN nuclear watchdog, said that
Iran had fulfilled its obligations in July 2015. Iran has
limited its LEU (low enriched uranium) stock and
removed the heart of the heavy water reactor at
Arak in order to reduce its production of plutonium1.
The lifting of sanctions will be gradually effected
over the next ten years, while over a period of
fifteen years the sanctions can be restored in case
of failure by Tehran to meet its requirements. The
removal of sanctions will revive the Iranian
economy, particularly through the recovery of
foreign trade and investments.
The impact of lifting sanctions on
Iran’s economy
Iran is the second largest economy in the Middle
East and North Africa (MENA) region. According to
the IMF, its GDP stands at 416.5 billion USD.
Following two years of recession, the economy
registered a growth of 4% in 2014, on the back of
the easing of trade and financial sanctions through
an interim agreement with P5+1 countries, in
November, that supported economic activity
(although it was short-lived).
Prior to 2011, the Iranian economy attracted, on
average, 4 billion USD (nearly 1% of GDP) of
greenfield investments per year. Most of this was
directed towards the oil and gas and manufacturing
sectors2. The tightening of sanctions after 2012,
however, brought FDI flows to a halt. This had a
negative impact on the country’s accumulation of
technologies and expertise. With the removal of
sanctions, the country’s national authorities expect
to attract foreign investments of at least 50 billion
USD a year. This figure is far above the 2.1 billion
USD of FDI inflows that Iran attracted in 2014. In
October 2015, the Ministry of Roads and Urban
Development organised a major conference to
present investment opportunities, valued at 28
billion USD.
Key sectors that should lead the economy’s
recovery in the post-sanctions period include
transportation, housing and urban development.
1. IAEA Director General’s Statement on Iran on January 16th, 2016.
(https://www.iaea.org/newscenter/news/iaea-director-general%E2%80%99s-statement-iran)
2. World Bank, MENA Quarterly Brief, Economic Implications of Lifting Sanctions on Iran, July 2015
PANORAMA
IRAN
Table 1: Iran macro indicators
2014
2015f
2016f
4.3%
0.5%
3.8%
Current acc. bal. (1)
4.5%
2.4%
1.5%
Budget balance (1)
-1.1%
-2.9%
-1.6%
Government debt (1)
15.8%
16.4%
15.3%
Inflation (2)
15.5%
15.1%
11.5%
GDP (%)
(1)
(2)
% of GDP
Yearly average
Sources: Official statistics, IMF, BMI, Coface
Besides the oil and gas sector that the economy
relies heavily upon, and the other industries
mentioned above, the country has opportunities in
almost every sector (see section II Forecast for
Iranian sectors).
During his trip to Europe in January 2016, President
Rouhani sealed a 25 billion USD deal to buy 118
civilian aircraft from French company Airbus. He
also signed deals worth approximately 15 billion
USD with Italian companies from various sectors,
including
transportation,
infrastructure
and
machinery. The country has also announced a “new
era” of cooperation with China, with whom it has
signed 17 contracts, including for the construction of
two nuclear energy plants in southern Iran. National
authorities expect trading volumes between the
two countries to rise to 600 billion USD within the
next decade, up from around 55 billion USD in 2014.
Coface expects GDP to grow by 3.8% during the
upcoming fiscal year, which will begin in March
2016. Following the signature of the interim nuclear
deal in 2013, the economy witnessed a short lived
boost, before lower oil prices and delayed
consumption and investment expenditure resulted
in a slowdown. The medium-term economic
outlook appears to be better, as lower trade and
financial transaction costs, easier access to
international
markets
and
higher
foreign
investments should support GDP growth.
According to the IMF3, lower trade and financial
transaction costs should add around 0.75 to 1
percentage points to GDP growth.
Iran’s economy is mainly driven by private
consumption; which accounts for 39% of GDP4 .
With the lifting of sanctions, this share may
gradually increase over the upcoming period, as the
easing of inflationary pressures would support the
purchasing power of households. The greater
availability of foreign goods should also boost
private demand. As regards fixed investments (27%
of GDP), huge obstacles such as corruption, heavy
bureaucracy and nepotism could delay a solid
recovery despite the soaring interest of
international companies to return to the Iranian
market following the removal of sanctions.
Government consumption (11% of GDP) may see
“Iran’s economy is mainly driven by private
consumption; which accounts for 39% of GDP.”
3. IMF 2015 Article IV Consultation
4. BMI, Iran Country Risk Report, Q2 2016
3
a small increase, thanks to fiscal consolidation which
includes efforts to boost tax revenues, reform
subsidies and tighten spending. Iran is trying to
improve its tax revenues, as only around 40% of the
country’s economy currently pays taxes. As the
sanctions are removed, the government may try to
accelerate subsidy reforms and its plans for
privatisations. Despite this, the budget balance
would remain in the negative zone, as the country
increases social and educational spending.
Iran’s growth will also benefit from the spillover
from higher oil production and exports, which
account for 22% of GDP. Iran’s hydrocarbon exports
are also expected to rise with the country’s return to
the global market. Iranian oil production has been
negatively affected by the restrictions imposed on
exports. With the rebuilding of this sector (mainly
by foreign investors such as Royal Dutch Shell, BP,
Eni and Lukoil, which now see a better investment
climate in the country), Iran’s oil production could
reach 3.7 million bbl/day in 2016 and 4.4 million
bbl/day by 2020. The non-hydrocarbon economy
will also benefit from a resurgence in oil production,
as well as from renewed economic confidence.
With the implementation of sanctions and Iran’s ban
from international financial markets, Iran’s currency,
the rial, lost around two-thirds of its value against
the US dollar. This situation caused a sharp increase
in inflation that reached 40% in 2013, linked to the
rising prices of basic food as well as soaring fuel
prices. President Rouhani’s administration, which
took power in 2013, has curbed inflation.
With the roll back of global sanctions, authorities
now see inflation declining to single digits by 2017.
The Statistical Center of Iran announced that the
inflation rate for the 12-month period ended on the
last day of the tenth Iranian calendar month
(January 20) was 12%, compared to the same
period in the previous year.
With inflation falling to below 15%, the government
saw an opportunity to loosen monetary policy. In
October 2015, it unveiled a new economic stimulus
plan, designed to curb inflation and support the
economy. According to a media report published
by Reuters, the plan foresees a cut in the central
bank’s interest rate, a cut in banks’ legal reserve
requirements to 10% from 13% and a lowering of the
interbank interest rate to 26% from 29%. The
government would also pump 75 trillion rials (about
2.2 billion USD), approximately 0.5% of GDP, into
the country’s development budget within a
fortnight.
Although Iran’s current account balance shrank
from 11% of GDP in 2011 to 4.5% in 2014, due to the
sanctions restraining oil export volumes, it remained
positive. Since mid-2012, revenues from oil exports
have fallen by more than 60%, due to the fall in
volumes and lower oil prices. During the same
period, non-oil exports have risen from 5% to 8% of
GDP. From 2012 to 2014, trade flows declined
consistently, due to sanctions. Iran’s imports of goods
dropped by 13.8% yoy, to 67.1 billion USD, while
exports plunged by 32.4% to 98 billion USD.
4
PANORAMA
IRAN
Trade flows would have been higher by at least 17
billion USD, had sanctions not been implemented. On
the other hand, imports declined by around 12 billion
USD (around 3% of GDP), due to the sanctions related
higher costs of doing business and the depreciation of
the local currency. In 2015, the rial’s official exchange
rate depreciated by around 10% against the US dollar,
reaching 30, 178, as of mid February 2016. Under the
cumulative effects of the lifting of restrictions and the
fall in transaction costs for exports, Coface expects the
current account surplus to GDP ratio to stand at 1.5%
of GDP in 2016. The tightening of international
sanctions also modified the composition of Iran’s
major trade partners. While during the first . half of
2000, Europe was Iran’s major trade partner,
accounting for more than one third of Iran’s total
exports and imports, since 2012, India, China and
South Korea have replaced European countrie. Third
of Iran’s total exports and imports, since 2012, India,
China and South Korea have replaced European
countries .
Transitioning from autarky to trade
openness
Limitations remain..
Technical constraints remain
As highlighted in the first section of this report, the
lifting of sanctions following the P5+1 agreement will
have significant short term and long term effects on
raising Iran’s output. However, transitioning from an
autarky regime with four years of sanctions, towards
trade openness in the context of an unfavorable
environment, may limit the gains made through the
removal of sanctions.
Iran should greatly benefit from the lifting of
sanctions but export growth could, however, be
weaker than expected. In the short term, the
reopening of Iran’s economy to global trade should
be progressive. Iran is the biggest market outside
the WTO. The country is relatively closed and the
authorities will favour a gradual opening of tariff and
non-tariff barriers. Iran has extensive tariffs on
imports and exports across a range of goods in the
country. Imports valued at over US$50,000 are
subject to a pre-shipment quantity and quality
inspection. In addition to the policies on tariffs,
regulatory constraints and bureaucratic inflexibility
are likely to hamper trade growth in the short term.
According to the World Bank’s ‘Doing Business’
rating, the time and costs associated with
procedures in Iran are high compared to other
countries. The gradual reopening of banking
channels will also limit export growth. Although,
Iranian banks now have access to the swift system,
money transfers are still not operational. The lack of
foreign reserves in banking balance sheets may also
hinder the increase in trade flows.
Moreover, isolation, lack of investment and a
weakened banking system will hamper the positive
dynamics of reintegration into the global world trade
market.
Graph 1: Trade openness index
(Exports and imports of goods and services measured as a share of gross domestic product)
100%
90%
80%
70%
1977: Start of
Islamic Republic
revolution
60%
50%
The twenty year period of sanctions changed Iran’s
economy. The combination of the 2012 oil embargo
by the EU and the ban on oil-related financial
transactions led to a significant decline in oil sales.
The international trade ban has been associated
with macroeconomic dislocations in the country’s
domestic economy. Restrictions on imports, parallel
foreign exchange markets and high inflation, have
all contributed to a significant slowdown. The
political economic framework, based on “an
economy of resistance”, has encouraged the
deflection of imports towards domestic production,
through subsidies and state support instruments.
Years of sanctions have encouraged Iran to
diversify the fabric of its domestic production, by
protecting it from international competitiveness.
Table 2: Doing business in Iran
1994: Balance
of payments
crisis
Indicator
40%
Iran,
Middle East & OECD high
Islamic Rep North Africa
income
Time to export: Border compliance (hours)
107
65
15
Cost to export: Border compliance (USD)
565
445
160
30%
1979 :Beginning
of US sanctions
20%
10%
1988: End of the
Iran/Iraq war
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0%
2000:
started rising.
Iran, Islamic Rep.
East Asia & Pacific (all income levels)
Arab World
High income: OECD
Sources : World Bank national accounts data, and OECD
National Accounts data files.
Time to export: Documentary compliance (hours) 159
79
5
Cost to export: Border compliance (USD)
143
351
36
Time to import: Border compliance (hours)
148
120
9
Cost to import: Border compliance (USD)
660
594
123
Time to import: Documentary compliance (hours) 284
105
4
197
385
25
Cost to import: Documentary compliance (USD)
Source: World Bank, Doing Business 2016
5
PANORAMA
IRAN
Loss of price competitiveness resulting from
the high rial …
The sudden shock of trade openness may have an
adverse effect on the country’s exchange rate. Iran has
a dual exchange rate system, with an official fixed rate
for imports of selected priority goods and a bureau
market determined rate for all other current account
transactions. Uncertainty over Iran’s external
environment has led to bouts of volatility in the parallel
market. The differential between the two exchange
rates exceeded 30% when the parallel market
reached its lowest point, in 2012. The return of frozen
assets and an increase in oil revenues should induce
an appreciation of the exchange rate, allowing the CBI
to unify the dual foreign exchange rate systems.
According to an interview with the CBI’s governor in
early January, a single foreign exchange system will be
introduced into the country within six months. The
appreciation of the real exchange rate would,
however, be unfavourable to local businesses.
Although Iran's central bank is considering conducting
an accommodative exchange rate policy by devaluing
the rial, it could be constrained by the disinflation
policy.
Graph 2: Official and parallel exchange rate
Official and parallel exchange rate
35000IR
30000IR
25000IR
The opening shock could therefore penalize the
sectors that are the least prepared against outside
competition such as agriculture and industry. As
noted in Devarajan, S. and L. Mottaghi. (2015)5, Iran
went through a similar scenario in 1990, following the
end of the war between Iran and Iraq, when the
country experienced a significant increase in oil
exports. The oil service sectors were then heavily
subsidised, in order to compensate for their loss of
competitiveness. This policy may have allowed Iranian
companies to exist in a self-sufficient environment
that obstructed their development (difficult access to
intermediate consumption, little technical progress,
etc. ...).
…Could lead to a lack of diversification
In the medium term, liberalisation is expected to
generate an efficiency boost but the risk of the Dutch
Disease6 scenario remains. Productivity shocks, due to
the removal of trade restrictions, would effectively
lower the prices of imported financial and transport
services and improve the efficiency of sectors with
comparative advantages, such as oil. Trade openness,
however, may have an adverse effect on the most
vulnerable sectors, by substituting domestic
production with more competitive imported goods.
Substituting domestic production with imports may
also affect non-oil exports. Haidar (2015)7 shows that
one of the effects of sanctions was the deflection of
non-oil exports to Iran friendly destinations. Moreover
Haidar demonstrates that exporters reduced their
product prices as they deflected exports to new
destinations. The weakness of the Iranian currency
and the impermeability of the sanctions regime
encouraged not only the diversification of the national
economy but also new destinations for non-oil
exports. Furthermore, even though the oil sector
currently accounts for 80% of exports, it only
represents 0.7% of total employment while non oil
sectors represent 38% of employment.
20000IR
15000IR
“We are concerned that the Dutch Disease
returns; what Iran has experienced for
several times before”.
10000IR
5000IR
0IR
2010/11
2010/12
2010/13
Parallel Exchange Rate, average (IR/S)
2010/14
2010/15e
2010/15f
2010/15f
Minister of Economic Affairs and Finance
Ali Tayyeb-Nia, Mars 2015
Exchange rate, official rate (average) (IR/S)
Sources: IIF, November 2015 database
5. Devarajan, S. and L. Mottaghi. (2015) “Economic Implications of Lifting Sanctions on Iran” Middle East and North Africa Quarterly Economic Brief, (July),
World Bank, Washington DC / World Bank, MENA Quarterly Brief, Economic Implications of Lifting Sanctions on Iran, July 2015
6. large inflow of foreign currency results in an appreciation of the local currency and so makes the manufacturing sector less competitive.
7. Haidar, J. I. (2015). Sanctions and Exports Deflection: Evidence from Iran. Paris School of Economics, Mimeo.
6
PANORAMA
IRAN
Graph 3: GDP components in Iran
Share of economic sectors in gross domestic product in 2013/2014
7.05%
1.64%
15.99%
1.18%
3.99%
Services
15.24%
17.32%
60.61%
13.62%
10.07%
7.18%
3.26%
6.53%
Agriculture, hunting, forestry and fishing
Oil and Gas
Mining
Manufacturing
Electricity,Gas and Water Supply
Construction
Trade,Restaurants and Hotels
Transport, storage and Communications
Financial Services
Real Estate and Professional Services
Sources: Central bank of Iran, Coface
Lack
of
confrontation
from
international
competition and weak imports of capital goods
have
resulted
in
reduced
non-price
competitiveness. Without an appropriate industrial
policy to protect its most vulnerable sectors, Iran
may experience a contraction in its domestic fabric.
According to the IMF quality index database, Iran’s
export quality remains low for all commodities
(although it is still higher than in other less
diversified countries such as Nigeria and Algeria).
The dataset only makes it possible to analyse
exports and production quality until 2010 but we
can reasonably well assume that with the
strengthening of sanctions in 2012, the quality index
may have taken a downwards path. One of the main
reasons to explain this inflection could be the
limited access to quality input and the monopoly
position on the domestic market. The car industry is
a good example of this. This is Iran’s second largest
industry, following oil, and one of the country’s most
protected sectors (see page 11). Prior to 2012, the
two main Iranian car makers had joint venture
partnerships with international car manufacturers.
Following the UNO ban, foreign car companies
were obliged to leave the market. In August 2015,
Kodhro (the largest car manufacturer) was targeted
by a hard hitting boycott campaign, which accused
the company of cheating Iranian consumers by
selling them overpriced, low quality cars.
The changes in domestic production are also likely
to affect the employment structure and wages. The
World Bank estimates that the Iranian economy
needs to create five million jobs over the next 5
years, under the assumption of a 5.5 percent GDP
growth rate, to keep the unemployment rate at 10
percent. Without a surge in investment into the
tradable sector, the
appreciation in the real
exchange rate will put pressure on agriculture and
industry and encourage the service sector. This
could be disruptive for the work force, which has
greater dependency on tradable sectors. Trade
openness should also have an effect on wages.
According to Ianchovichina, Devarajan, and Lakatos
(2016)8 , the expansion of Iran’s oil sector should
raise the real price of capital by 7.8 percent, as the
oil sector is an intensive user of capital. Wages
increases, which will come from the spillover effects
of the oil sector, should be equivalent to 1.0 % for
skilled and 0.5 percent for unskilled workers.
“One of the main reasons to explain this
inflection could be the limited access to
quality input and the monopoly position
on the domestic market.”
8. Ianchovichina, E., Devarajan, S., & Lakatos, C. (2016). Lifting economic sanctions on Iran: global effects and strategic responses. World Bank Policy
Research Working Paper, (7549).
7
PANORAMA
IRAN
An unfavourable global environment
Graph 4: Quality evolution overtime :
the case of oil countries
The lifting of sanctions comes during a challenging
environment. Sluggish world trade, subdued oil
markets and regional turmoil, are all likely to dampen
the initial positive impact from the lifting of sanctions
and the reduction in trade costs. Moreover, Iran’s
return should have a significant effect on the oil
market itself. According to Devarajan, S. and L.
Mottaghi. (2015)9, the possible addition of one million
barrels a day (mb/d) from Iran, assuming no strategic
response from other oil exporters, would lower oil
prices by 14 percent or $10 per barrel in 2016. As the
Iranian economy is heavily reliant on oil outcomes to
boost its domestic economy, the fall in revenues
induced by the oil market situation would constrain
public investment and the government’s policy
support for post sanction growth.
Export Quality Index
1.1
1
0.9
0.8
0.7
0.6
According to Ianchovichina, Devarajan and Lakatos
(2016), the potential welfare gain10 from the removal
of embargoes depends on several assumptions. The
best scenario would be a strategic response from oil
exporters to induce a reduction in the world’s oil
supply. In this case, the benefits from the removal of
sanctions could reach 30 billion dollars or an increase
in per capita welfare of 6.2%, due to the effects of
stronger terms of trade. This scenario is made under
the assumption that Iran is able to sell pre-embargo
quantities at world oil prices that are 13 percent higher
than the current ones. However, if there is no change
in price levels, Iran would benefit from an increase of
18 billion dollars (or an increase in the GDP per capita
of 3.7%). In summary, the unfavourable conjuncture of
oil market prices could cost Iran a welfare gain of 12
billion dollars, or 2.8% of GDP.
0.5
0.4
1963
1968
1973
France
1978
1983
1988
Algeria
1993
1998
2003 2008
Nigeria
Iran
Sources: IMF, The Diversification Toolkit Export
Diversification and Quality Databases (Spring 2014)
Graph 5: Export quality indexes 2010**
It measures across different aggregation levels of export the
export quality
1.2
1
0.8
0.6
0.4
0.2
All Commodities
Maneral fuels & related
Animal & vegetable fats
Manufact goods
Crude products expt fuels
Food and live animals
Machinery equipment
Chemicals
Allcommodities
Nigeria
Algeria
France
0
Foreign Direct Investment (FDI) flows, following the
lifting of sanctions, will also be affected by the
unfavourable economic environment. FDI declined by
billions of dollars following the tightening of sanctions
in 2012. Prior to 2011, FDI to the Iranian economy
averaged around $4 billion a year, in the form of
greenfield and brownfield investments. Oil & gas,
along with manufacturing, were the two main sectors
receiving FDI. Oil & gas industries attracted over half
of total FDI inflows. The lifting of sanctions is expected
to encourage a progressive recovery in the foreign
investment that the authorities rely on to
Iran***
**Higher values for the quality indices indicate higher quality levels
*** Only Iranian sectors with comprarative advantage are represented
9. Ibid. Devarajan, S. and L. Mottaghi. (2015)
10. The economic welfare that is gained as a result of increasing or decreasing the production and consumption of goods or resources
8
PANORAMA
IRAN
support investment needs, as well as access to
technology spillovers. The oil & gas investments
needed to maintain Iran’s oil production capacity are
estimated to be between $130 - 145 billion by 2020.
The large South Pars gas field alone will require $100
billion. According to Mohammad Khazaei, the Iranian
deputy minister of economy, the country aims to
attract 7 billion dollars of foreign direct investment by
the end of the current Iranian calendar year (March 19,
2016). To enhance the country’s attractiveness, Iran is
focussing on improving its business climate through
reforms such as the Foreign Investment Promotion
and Protection Act (FIPPA). The FIPPA will allow tax
exemption in strategic sectors targeted by the
authorities. It will also provide other incentives to
attract foreign multinational companies, including the
development of a free zone and a programme of
industrial parks. Nevertheless, the downwards trend in
oil prices and regional turmoil may hamper the
recovery of FDI outflows, especially in the oil & gas
sector. The World Bank expects that FDI inflows will
range between $3 to $3.2 billion in 2016 and 2017
respectively, if economic growth rebounds to 5.5% in
2017. According to the IMF, FDI recovery is likely to be
slower, with foreign outflows close to zero in
2015/2016 and almost $2 billion in 2016/201711 .
Infrastructure weaknesses
Gains from the lifting of sanctions will also be limited
by infrastructural deficits. In terms of infrastructure,
Iran is comparatively highly-developed, with 99
airports and over 10,000 kilometers of railway.
However, the country’s infrastructure has been falling
into obsolescence, with a lack of investment during
the period of sanctions. The low growth rate and the
contraction of oil revenues due to the embargo,
limited the government’s ability to invest in
infrastructure utilities. Indeed, the lack of viable
infrastructure could represent one of the main
bottlenecks to the expected rise in growth, post
sanctions.
Even with the fall in trade costs, the lack of
infrastructure will limit the expected growth in foreign
trade. The efficiency of Iran’s transport infrastructures
has declined and the shipping industry has seen the
quality of its ports severely deteriorate over the past
decade. The Global Competitive Report from the
World Economic Forum 2015-2016, ranks Iran 76 out
of 144 countries for the quality of its infrastructure, 63
for the quality of its roads, 118 for the quality of its air
transport infrastructures and 78 for the quality of its
port infrastructures. Iran's transport infrastructure
poses a key challenge to the development of its
non-oil
industries,
especially
tourism
and
manufacturing, and the efficiency of its transport
network is low. The World Bank’s Logistics
Performance Index measures logistical efficiency from
1, for the least efficient, to 5 for the most efficient. Iran
was rated at 2.42 in 2012, while Egypt reached 3 and
Saudi Arabia 3.22.
Iran is planning to invest massively in its public
infrastructure. The government intends to take on
several projects, once sanctions are lifted. These
projects include highways, railroads, ports and airport
facilities. Significant investments are planned for the
development of the national road network and to improve
Graph 6: Iran’s rank in the global competitiveness report 2015-2016
Quality of electricity supply
58
Available airline seat km week, millions
56
Quality of air transport infrastructure
118
Quality of port infrastructure
Quality of railroad infrastructure
Quality of roads
Quality of overall infrastructure
78
45
63
76
Source: Global Competitiveness report 2015-2016
11. IMF Executive Board Concludes 2015 Article IV Consultation with Iran Press Release No. 15/581
December 21, 2015
connections to neighbouring countries. Among the
projects presented, the authorities intend to extend
the road network by building 745 kilometers of
freeways, 5,626 kilometers of highways and 2,970
kilometers of main roads. The purchase of over 100
Airbus aircraft to complete the Iranian civilian fleet,
along with the construction of two additional transit
terminals at Imam Khomeini International Airport,
will support the development of the country’s air
transport links.
However, the contraction of fiscal revenues could
pose problems to the funding of public investments.
Iran’s investment needs are substantial and an
important share of current investments is already
absorbed by the construction sector. According to
CBI data, private investments accounted for 75% of
total investments in 2013/2014. Of these, 60 % were
directed to the construction sector, while the rest
was assigned to production capacities. Furthermore, public investments are limited by the
important subsidies and supports made to the
population. The budget bills presented in December
2015 were based on an oil price per barrel of $40
(above the current market price). The government
is counting on the return of frozen assets, an
increase in oil exports and capital inflows to finance
its required investment but all of these are likely to
fall short of expectations.
A weak banking sector
The weakness of the banking sector is another key
challenge to faster growth in Iran. The Iranian
banking sector is dominated by state-owned banks.
Six of the largest are commercial banks (the main
one being Bank Melli) and five are specialised banks.
Iranian banks operate according to Islamic
principles. The strengthening of sanctions in 2012
2
9
PANORAMA
IRAN
and the exclusion of Iranian banks from the
international trading system have enfeebled the
banking sector. Their profitability remains low and
the return on assets was estimated at only 1% in
2012/2013. Furthermore, Iranian banks do not apply
international macro prudential rules and were
protected from international competition. Bank
balance sheets remain weak and the banking
system represents a risk. Banks are under capitalised and subject to high levels of non-performing
loans (12%). They are also in competition with
unlicensed financial institutions (UFIs) which are not
within the same regulatory framework but absorb
16% of deposits. Banks are also exposed to public
debt. According to the IMF, the exact amount of
public debt (government and government related
entities, as well as public company debt) is not
known precisely, but an important share of it is
owed to the banking system. In addition, the
contribution made by banks to growth, via banking
credit, is not efficient and is heavily controlled by
the authorities.
Moreover, the ability of Iran’s banking system to
meet the rising financing needs of post-sanction
growth is questionable. Foreign banks will take time
before they return to the Iranian market and, at this
stage, are still adopting a wait and see approach.
The main reason for this cushioned position,
especially for European banks, is the risk of being
banned or sanctioned by the US market. Even if
nuclear sanctions have been lifted, Iran is still subject
to other sanction regimes in the US. The shadow of
“snap back”12 sanctions also remains a major
consideration for foreign banks in their
commitment to the Iranian market. Risks of a return
to a new sanction era are continuing to have a
discouraging effect on financial institutions.
FORECAST FOR IRANIAN SECTORS
According to Coface, two sectors are good
illustrations of both the untapped potential
economy and the challenges faced by Iran entering
the market oil & gas and the automotive sector. The
lifting of sanctions will have the biggest impact on
Iran’s energy sector, as the country has the world's
fourth largest proven oil reserves and second
largest proven gas reserves. Iran’s economy is
mainly reliant on the oil and gas sector. Prior to the
sanctions, Iran was the most important car producer
in the Middle East. The automotive sector is the
country’s second largest sector after oil and gas,
accounting for 10% of GDP13 .
The rebirth of Iran‘s energy sectors
Iran holds the world's fourth largest oil reserves,
following Venezuela, Saudi Arabia and Canada.
Much of Iran's reserves are onshore (70%) and 80%
are located in the Khuzestan province, in the
country’s south-west, near the Iraqi border.
According to data from the US Energy Agency
(EIA), 50% of Iran's reserves are concentrated in
five major oil fields. The Marun oil field is estimated
at 22 billion barrels, the fields of Ahwaz at 18 billion
barrels and the fields of Aghajari at 17 billion barrels.
The sector’s structure is dominated by a state
owned monopoly. The National Iranian Oil
Company (NIOC) controls all upstream and downstream oil and gas activities, while refining and
distribution activities are carried out by the state run
National Iranian Oil Refining & Distribution
Company. Foreign companies had limited access to
Iran’s oil sector. The Buyback contract (which was
first introduced in the 1990s), was an attempt to
bridge the gap between the country’s need to
attract foreign investors and the ban on foreign
ownership of natural resources under the Islamic
Republic’s constitution. Commonly used since its
introduction, the existing buy back contract model
is a short term service contract between the state
owned National Iranian
12. The snapback clause is the ability to snap back sanctions if at any point Iran materially breaches its commitments under the JCPOA.
13. Ibid Devarajan.S & Mottaghi (2015).
10
PANORAMA
Oil Company (IOC) or one of its subsidiaries, and a
foreign company. Under this type of contract, the IOC
agrees to explore or develop a field and to fully fund
the project but does not gain the physical assets of the
development. Instead, it receives an annual
repayment rate based on a pre-agreed rate of return.
Iranian oil fields are mostly mature but their
production was limited. The country has not reached
its full productive potential and the occurrence of
sanctions on Iranian oil exports from 1995, reinforced
in 2011, accelerated the sector’s obsolescence. The
EU’s oil ban and the slowdown of Asian demand have
greatly limited the sector’s economic perspectives.
Over a period of one year, Iran’s oil exports declined
from 2.8 Mb/d in July 2011, to below 1 Mb/d in July
2012.
The lifting of sanctions should lead to an increase in
the production of hydrocarbons - but this could be
constrained by the poor prospects of the oil market.
According to the International Energy Agency, Iran's
crude oil production, which averaged 2.8 Mb/d in
2015, is forecast to average over 3.1 Mb/d in 2016 and
almost 3.6 Mb/d in 2017. The gradual opening of the
country should also encourage investment into the oil
sector. With the proper investments, Iran could
eventually reach a production of 4 Mb/d. Several
foreign companies that were present before the
sanctions could re-enter the market.
Nevertheless, the upgrading of infrastructures will be
costly. The sector’s financing needs amount to over
$200 billion according to the Iranian Minister of
IRAN
Industry ($130 according to the World Bank’s
estimates). Furthermore, in the current context of oil
price declines, the entry of Iran into the global market
may further accentuate the imbalance between
supply and demand thus leading to a decrease in the
profitability of investments in the medium term. The
difficulties encountered by the major oil companies in
the context of falling prices could slow their
investments in Iran. To increase the attractiveness of
its oil sector, the Iranian authorities have introduced a
new integrated oil contract (IPC), which should offer
attractive commercial terms to oil companies. The Iran
Petroleum Contract (IPC) is set to replace the
traditional buy back scheme. The IPC has had to face
much criticism within Iran since it was launched. A final
version of the contract has been revised by the NIOC
and should be presented in April 2016.
Iran has the second largest proven gas reserves in the
world, estimated by the American Energy Agency
(EIA) at 33.6 trillion in 2015. The proven gas reserves
are predominantly offshore non associated fields
(62% of total). Onshore reserves are divided between
non associated gas fields (19%) and associated gas
fields (19%). The giant South Pars deposit that Iran
shares with Qatar comprises two thirds of all proven
reserves, but, the country’s development of its large
gas fields has been limited. The gas sector, as the oil
sector, has been constrained by the strengthening of
sanctions. The gradual lifting of export restrictions
should allow Iran to gradually increase gas exports.
However, the gas market remains highly competitive.
Iran will need to catch up with Qatar or Australia, who
both invest massively in innovations and
infrastructures.
Graph 7: Iran oil production since sanctions
4
3.5
$140
Iran Oil production (LS)
Brent 1st ICE (R.S)
3
2.5
$120
$100
$80
2
1.5
1
0.5
Ja
n11
M
ay
-11
Se
p11
Ja
n12
M
ay
-12
Se
p12
Ja
n13
M
ay
-13
Se
p13
Ja
n14
M
ay
-14
Se
p14
Ja
n15
M
ay
15
Se
p
15
Ja
n
16
0
Sources: EIA Bloomberg, Coface
$60
$40
$20
$0
11
PANORAMA
IRAN
INTERVIEW
Inset n°1
THREE QUESTIONS TO CLÉMENT THERME
Clément Therme is a Research Fellow at the Centre d’analyse et d’intervention sociologiques
(CADIS) and at the Centre d’études turques, ottomanes, balkaniques et centrasiatiques (CETOBAC)
of the School for Advanced Studies in Social Sciences in Paris.*
What are the issues behind February’s elections? Do
they represent a risk to continuation of the country’s
opening policy?
The main issue behind the vote is the opportunity for
the Iranian political system to open up to Western
investments in key strategic sectors such as the oil and
gas industries or the automotive sector. The strategic
decision of President Rohani to open a dialogue with
the West received a large support of the Iranian public
opinion in the 26th of February elections for the majles
(Iranian parliament) and the Assembly of Expert
which is in charge of choosing the Supreme Leader of
the Revolution. The elections of key allies of President
Rohani such as Ayatollah Rafsanjani (he ranked first in
the list of the Moderates in Tehran for the Assembly of
Expert) and Mohammad-Reza Aref at the majles is a
strong message of the majority of the Iranian population that they want more economic relations with the
West.
What will happen to the agreement if a
republican president came to be elected and
returned on the US sanction remoral toward non
US citizen ?
The Joint Comprehensive Plan of Action (JCPOA) of
the 14th of July 2015 was endorsed by a UN Security
Council resolution (UNSC) 2231 (2015). This is a legally
binding resolution and as a permanent Member of the
UNSC, the United States will probably not condemn
the resolution. Even a Republican president will have
to comply to the Resolution and in the case of
denouncing the JCPOA, China, Russia and European
allies will not follow such a move if Iran respects its
engagements. The political risk with the end of
Obama’s presidency is broader. A new American
president could try to impose new nuclear non-related
sanctions such as Human Rights sanctions or for the
development of the Iranian ballistic military
programme. Last but not least, a new American
President could be more receptive to the Israeli and
the Saudi pressures for a more hard-line diplomacy
towards Iran.
What could you tell us about the Iran and Saudi
Arabia rivalry?
The Iranian opening is perceived by Saudi Arabia as a
threat for the Sunni Arab community in the Middle
East. The Saudi-led military intervention in Yemen of
March 2015 was a “message” to Iran against what
Ryad perceived as the so-called “Shia Crescent”
against its allies in the region. In return Iran portrays
itself as a victim of “takfiri” Islam broadly defined as
Muslims supporters of the Wahhabi doctrine. Since
the Syrian war of 2011 this regional rivalry intensifies in
the region but the two powers are not fighting
directly. In this Cold War, France followed the
President Obama strategy to rebalance US regional
diplomacy from an exclusive alliance with Israel and
Saudi Arabia to a decrease in the hostile relationship
with Iran. The rise of tensions between the two
regional powers complicates the diplomatic
objectives of Western powers to preserve cordial
relations with the two countries. Nevertheless, with
the economic rapprochement between the EU
countries and Iran and the rise of Daesh, one has to
consider the new dynamics in Iranian-Western
relations. This can be an asset to pressure the two
rivals in order to avoid a regional confrontation
detrimental to the people of the Middle East. But this
can also be seen by Israel and Saudi Arabia as a threat
to their regional diplomatic positions in the region.
*He is also a teaching fellow at Sciences Po and at the National Institute for Oriental Languages and Civilizations
(Institut national des langues et civilisations orientales). His articles have appeared in Politique étrangère,
Maghreb-Machrek and Politique américaine, and he is the author of Les relations entre Téhéran et Moscou
depuis 1979 (PUF, 2012) and the co-editor of a book entitled Iran and the Challenges of the Twenty-First
Century (Mazda Publishers, 2013).
12
PANORAMA
IRAN
Iran’s automotive industry: A slow
revival of the second largest sector
Graph 8: Iran automotive sales (million)
For years, international sanctions have been limiting
the development of Iran’s automotive industry which
was previously the largest car producer in the Middle
East. The automotive industry accounts for more than
10% of Iran’s GDP. Following Western sanctions and
the depreciation of the local currency, not only did the
output volume drop (from approximately 1.6 million
cars per year to less than 745,000), but
automotive prices soared by about 300%14. The rial’s
depreciation increased the cost of imported parts for
the automotive industry, causing a slowdown in
production and decline in employment. The car sector
is estimated to account for 4% of the total workforce.
2.5
Million Unit
2.0
1.5
1.0
0.5
0.0
2013
2014
Commercial vehicles
2015f
2016f
2017f
Passenger cars
Sources : BMI, Coface
With the relief of sanctions, the Iranian administration
is now focusing on reviving this important sector.
During his trip to Europe in January 2016, President
Rouhani signed several deals related to the car
industry. A joint venture deal, reached between
France’s PSA Peugeot Citroen and Iranian automaker
Khodro, has plans for the two companies to
modernise a factory near the capital, Tehran, and to
start producing cars by mid 2017. According to media
reports, the initial production target stands at
200,000 vehicles per year and the French company
will invest a total of 400 million EUR within five years.
“The automotive sector which accounts for 10 of GDP and 4%
of employment, should gradually reach its pre-crisis output
levels.”
Waiting for Western cars
As mentioned, the automotive sector will be one of
the biggest beneficiaries following the lifting of
sanctions. Iranian consumers are hungry for
international brands and the removal of sanctions will
provide the opportunity for further Western car
producers to enter the market. The demand for
vehicles will gradually increase and the growing
young and brand-conscious population will be one of
the main supports for demand. As at 2015, Iran’s
population was estimated at 75 million people. Of
these, 37.5 million belong to the 15-40 year old age
group15 .
Higher economic activity in the post sanctions era and
improved conditions for financing infrastructure
projects could sustain demand for commercial
vehicles.
14. Al Monitor, Iran works to get auto industry back on the road, August 2015
15. BMI, Demographic Outlook Iran, 2016
Major car makers rush into Iran
Iran Khodro Company (IKCO) is the largest auto
manufacturer in Iran. Founded in 1962, IKCO produces
its own range and produces under license for other
manufacturers. In 2010, according to IKCO’s website, it
produced 755,555 cars, accounting for around 50% of
the market.
Société Anonyme Iranienne de Production Automobile (SAIPA) is the second largest Iranian auto
manufacturer. It produces passenger and commercial
vehicles, based on models previously manufactured
by Kia and Renault. It is also focusing on developing its
own models, such as the Tiba. In February 2015, the
media reported that Saipa saw both production and
sales rise by 32% in 2014.
Following the removal of international sanctions, the
interest of international car manufacturers in the
Iranian market will increase. As mentioned above, the
administration has already started to sign deals with
French car makers. PSA Peugeot Citroen seems to be
the first beneficiary in Iran, as it has been present in the
market for a long time. Peugeot withdrew from Iran in
2012, due to international sanctions. However Khodro
continued to produce vehicles under the Peugeotbrand. Iran was the second biggest market for the
French car producer, after France.
Another French manufacturer, Renault SA which
suspended its business in Iran in 2013 following stricter
sanctions, was able to maintain the manufacturing
process in Iran although the volume of production
and sales were low. The company announced, during
a press conference in Tehran, in July 2015, that its first
priorities in Iran are to expedite manufacturing of
current models and to produce new models. Renault
also plans to develop its research center in Iran.
13
PANORAMA
IRAN
Renault Pars is a joint venture that was established
between Renault and Iran’s Industrial Renovation
Organisation (IDRO) in 2004. Renault’s car sales in
Iran totalled 36,300 cars in 2014, a drop of 9% from
the year before16 . In the first ten months of 2015, sales
stood at 30,030, up 7.3% compared with the same
period in 201417 .
allowed brands such as Chery and Lifan to increase
their exposure in Iran, as they were not covered by
restrictions. Chery initiated cooperations with Modiran
Vehicle Manufacturing Company (MVM) in Iran, early
in 2004. Over the last 12 years, it has become one of
the largest auto manufacturers in Iran, with sales of
nearly 40,000 units in both 2014 and 2015.
Other foreign car makers are also eyeing the Iranian
market for new opportunities. Daimler has announced
that its trucks division has signed letters of intent with
joint venture partners in Iran to re-enter the market.
This influx of foreign car makers will create tough
competition in the market, in terms of positioning
Iranian brands. On the other hand, Iran still has many
regulations in place to restrain imports. Daimler has
said that it will cooperate with Iran Khodro Diesel
(IKD) and Iran's Mammut Group, to establish a joint
venture for local production of Mercedes-Benz trucks
and powertrain components18 .
Other producers such as VW, Fiat and Skoda are also
reportedly in talks to enter the market. Depending on
the political and economic conditions, vehicle supplies
to Iran may increase in the upcoming period, through
new joint ventures.
The arrival of new manufacturing brands could make
it difficult for the companies already present to
maintain their market share. This could be the case for
Chinese producers if European car makers manage to
provide vehicles to the market which are cheaper and
of higher quality. Indeed, Western sanctions have
3
Conclusion
The lifting of sanctions marks the beginning of a new
era for Iran. Growth will record a significant uptick on
the back of skyrocketing foreign investments and a
recovery in private consumption, with lower
inflationary pressures. Yet some challenges will
continue to restrain growth over the coming period.
Some of these challenges are technical such as Iran’s
current tariffs policy, regulatory constraints and
bureaucratic inflexibility that could limit trade growth.
Other challenges are more related to structural issues,
such as the existence of dual exchange rates, the lack
of competitiveness and the lack of investments over
the past decade. In addition, the sustained decline in
oil prices will weigh on exports. The lifting of sanctions
should allow an increase in the production of
hydrocarbons but it could be constrained by the poor
prospects of the oil market. The Iranian administration
is also focusing on reviving the automotive sector,
which accounts for more than 10% of GDP. Higher
growth perspectives are positive for this sector,
although the competition will be tough for car makers.
Graph 9: Iran car sales by brand (2014)
350,000
40
300,000
35
30
250,000
25
200,000
20
150,000
15
100,000
10
Units (LHS)
Market share (%RHS)
Source: BMI
16. Tehran Times, Renault Never Left Iran During Sanctions, August 2015
17. Tehran Times, Renault’s One-Month Sales to Iran up 2.5 folds yr/yr, November 2015
18. Reuters, Truck maker Daimler signs agreement to return to Iran, January 2016
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